A beneficiary can be a natural or juristic person that you have nominated to receive the proceeds from your life insurance policy or retirement fund in the event of your death.
The importance of nominating a beneficiary
If no beneficiary is nominated, the proceeds will form part of your estate. They will attract unnecessary taxes and costs which will deteriorate your wealth and the financial provision that was meant to provide for a loved one.
5 Common beneficiary types
- Spouse
This is the most common beneficiary. The benefit of nominating your spouse as the beneficiary on your life insurance policy is that this nomination will not attract estate duty and/or capital gains tax. In terms of section 4(q) of the Estate Duty Act, all bequests and nominations between spouses are estate duty exempt. There is also a rollover on capital gains tax. - Minor children
There are quite a few clients that nominate their minor children to receive the proceeds from their insurance policy in the event of their death. The clients’ intentions are good, but what they often don’t realise is that minor children are not allowed to receive the proceeds from insurance policies if they are under 18 years old.If your child is listed as the beneficiary on your policies, the proceeds will pay the government-owned guardian fund and your client will only be able to claim, from the guardian fund, when they turn 18 years old. We advise drawing up a will that makes provision for a testamentary trust. The trust will be created on the date of death, and the child’s proceeds will be paid to the trust, protecting it from the guardian fund. - A trust
A trust can be nominated as a beneficiary. There are two types of trusts: inter-vivo trust and testamentary trust.Inter-vivo trust
An inter-vivo trust is a trust that has already been established. It is commonly referred to as an existing trust which is created while you are still alive.Testamentary trust
A testamentary trust is a trust that was made provision for your will and it is created at the time of your death. Its main purpose is to protect a child’s inheritance from the guardian fund.The benefits of nominating a trust as your beneficiary are longevity. The trust deed can be set up to benefit the beneficiaries of the trust. Trustees can also be appointed to make financial decisions in your absence. It is important to mention that a trust might not always be the best option from a tax sufficiency perspective and therefore make sure that you talk to a trusted financial advisor or tax expert. They will help you to make sure that you do not waste money with unnecessary taxes.
- Estate
Your personal estate can also be nominated to receive the proceeds of your policies if the specific insurance policy was taken out with the purpose to provide your estate with enough liquidity to settle any outstanding debt that will arise in the event of your death. A good example of when you can nominate your estate is if you have a capital need to settle the outstanding bond on your property. By nominating your estate to receive the proceeds from your policy, you will give the executor enough liquidity to pay off the bond, which will in turn allow your family to stay on the property without having to worry about paying the monthly instalment on that specific bond. - Third-party
A third-party beneficiary can be a family member or friend. This nomination will attract estate duty, which is a form of tax that your estate needs to pay at your death. It is important to pay careful attention to the liquidity in your estate when you make such a nomination.It is important to indicate your beneficiary when you apply for benefits. There are a few people who forget to name beneficiaries on their policies.We highly recommend that a backup beneficiary is also nominated as we have had a few clients and their nominated beneficiary pass away simultaneously. Do regular audits on your beneficiaries and ensure that they are still relevant to your needs.
